It happens to every business: An employee progresses through their role in the organization and becomes ready to move on. In knowledge-based businesses especially, most employees eventually decide to pursue new challenges and perhaps focus more deeply on a particular niche.
While most employees part ways on good terms and maintain strong connections with their former employers, whenever expertise leaves your team – expertise collected by progressing through your organizational structures – it is a loss in many ways.
A good company strategy is to offer well-defined boundaries. A great strategy is to find synergies with a partner network that provides opportunities that complement your business. Key to this is working with people you know and trust. This is where a spin-out strategy can help.
What is a spin-out?
Today’s knowledge-based businesses are moving away from using empirical, finance-driven performance metrics to measure the health of their organization. Instead, they are focusing on the key drivers of their success – their people. These organizations thrive when they foster a culture of entrepreneurial people with a close-knit team spirit. Employees feel more empowered, get more done, and are likely to develop into candidates who found new ventures.
[ Are you doing enough to build trust with your team? Read our related article, Want to build more trust as a leader? Make it a verb. ]
Parent companies with clear identities are by design more limited in terms of the culture and opportunities they provide: Clear boundaries make it easier to decide when something falls outside of the main focus. On the other hand, companies that try to be everything to everyone become messy quickly.
When talent starts forming around particular business functions, you have an opportunity to found a new venture where they can deepen their expertise, hire new talent from outside the parent company, and build a strong culture.
This is a spin-out. The great thing about spin-outs is that they are small – and beautiful. A small team builds strong bonds more easily and can forge a strong identity. Better still, it can quickly grow and scale relative to its size. Its nimble construction makes it easy to adapt to new market opportunities. A parent company with several spin-outs can benefit from the gravitas and solidity of a large organization while quickly reflecting new changes in the business landscape through its cluster of satellite entities.
4 types of spin-outs
At their core, spin-outs capitalize on different new business opportunities, which can be grouped into four categories:
- First is an adjacent business that has strong synergies with the parent company but would benefit from forming its own identity and value proposition. In this case, the core focuses would be different, but the business models would be similar, so many lessons could be shared.
- The second category occurs when there is an opportunity to develop a product-driven company. There may be synergies, but the business logic is expected to deviate from the parent company. These types of spin-outs typically require heavy investments and are risky, so the ownership is expected to dilute.
- Next are joint ventures/businesses with clients and partners. These spin-outs typically aim to disrupt specific industries and domains by combining world-class digital solutions with best-in-class industry knowledge.
- The final type of spin-out occurs through minority ownership in companies that are part of the same ecosystem but that significantly deviate from the parent company’s core focus and business logic.
Why spin-outs are great for employees
If an organization is the ultimate learning platform for its employees, then a company with a proven track record of spinning out new ventures shows prospective candidates that an entrepreneurial mindset could offer them the potential to level up in a secure environment and eventually go their own way. You provide opportunities for people who leave and lure in people who want to be entrepreneurs in the future.
Companies that are staffed by entrepreneurs have a deep pool of talent to draw from when building the next venture, and their culture will prime employees for leading new businesses. Spin-outs do benefit from external hires, and you want the founding team to broaden its expertise, but a core team of founders from the parent company will ensure a smoother transition and more seamless cooperation between companies.
Once established, these founders will be able to leverage the network and reputation of the parent company to accelerate their growth and hire new talent. In some cases, the founders may be able to skip much of the legwork that early-stage market arrivals typically wade through to become trusted by the right kinds of customers.
Final considerations
Again, people are key. A great founder candidate has a solid track record and extensive network in the parent company, and their strengths and weaknesses are well understood by everyone. Even so, the recruitment process should be robust, as the difference between being an intrapreneur in a big company and an entrepreneur in charge of building an organization’s processes is substantial.
Timing is important, but founders should be up for taking on risk, including the risk that markets may change, that a new venture will take time to figure out how to best collaborate with the parent company, or that the chemistry might not be right and changes must be made. This is why it’s essential for all parent-company team members to take a systematic approach to relationship-building and support structures.
Ownership of spin-outs that will expand the core offering is a good strategy, as it will create buy-in from people on both sides of the fence and reduce any competitive feelings. Another solid option is to include spin-out targets that feed into the parent company’s main goals. If you can find this balance, your family of companies is likely to grow and flourish.
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